The U.S. government has taken a dim view towards online gambling since the passage of the Unlawful Internet Gambling Enforcement Act in 2006. Now, two online poker companies operating outside the United States — PokerStars and Full Tilt Poker — have reached a settlement with the Justice Department totaling some $731 million — and customers will be reimbursed for money they had on deposit. Although the companies don’t admit to any wrongdoing, the settlement resolves charges they effectively engaged in money laundering to accept illegal bets, and potentially clears the way for PokerStars (which is surviving the deal) to resume operations in the United States — if — or more likely, when — Internet gambling becomes legal.
Prior to 2006, Internet-based gambling was effectively legal in the United States. Although the Federal Wire Act from 1961 prohibited transmission of sports betting information using telecommunications services, in 2002 a U.S. appeals court ruled that the sports-related provisions in the Wire Act did not preclude Internet gambling. Although some states and jurisdictions did have laws on the books specifically prohibiting online gambling, many did not — and so started a bit of an online gold rush as online gambling companies tried to capture chunks of the lucrative U.S. market.
As it turned out, most established U.S. casino operators and gaming companies chose not to get into the online gambling market, fearing the legal exposure from differing legal standards in different markets and an uncertain political environment — gambling, after all, is still a hot-button issue. Aside from issues of age verification, credit card fraud, and myriad of other obstacles presented by online gambling, how were online gambling operators to know that a player was located in a jurisdiction where online gambling was legal? Established U.S. gaming companies didn’t want to take the chance — and potentially put pressure on their existing businesses’ relationships with tax and regulatory authorities.
So overseas companies lept at the opportunity, and soon three firms came to dominate the U.S. online poker market: PokerStars, Full Tilt Poker, and Absolute Poker. PokerStars and Full Tilt are incorporated in the Isle of Man and the Channel Islands, respectively; Absolute Poker operates out of Antigua. All three companies were happy to accept payments from U.S. players, and the firms also engaged in high-profile advertising and promoted poker competitions to increase their visibility. The companies quickly became household names in the poker world, and the strategy worked: according to research firm H2 Gambling Capital, the U.S. online poker market comprised about 1.9 million players and over $18 billion in bets in 2010.
But that’s jumping ahead a bit. In 2006, the U.S. enacted the Unlawful Internet Gambling Enforcement Act (UIGEA), following what has often been described as a dubious legislative process. The act contains a provision in a title related to port security (yes, really) that bars “gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.” The law had some immediate impacts, and is generally consider the end of the “boom” in online poker: most overseas public companies that were accepting online bets from U.S. gamblers (like the UK’s PartyGaming) stopped doing so, but most privately-held firms continued to accept U.S. customers. Critics voices concerns that the shifting of online gamling operations to private companies increased the likelihood of unscrupulous firms operating in the market — perhaps companies that would turn a blind eye to underage gamblers and money laundering.
The UIGEA was at the center of a bitter World Trade Organization dispute between the U.S. and Antigua over the U.S.’s limitations on online gambling. Antique argued the U.S. was unfairly blocking its market to Antiguan gambling companies — and Antigua won. The U.S. settled the dispute not by lifting restrictions on online gambling operations, but by granting undisclosed other concessions. The terms of that settlement have not been made public.
Despite UIGEA being on the books, PokerStars, Full Tilt, Absolute Poker remained the largest Internet poker companies, and they continued to accept U.S players under the belief that the law could not be applied to poker — it’s a game of skill, not a game of chance, right? Then on April 15, 2011, the U.S. Department of Justice charged the owners of PokerStars, Full Tilt, and Cereus (the parent company of Absolute Poker) of engaging in bank fraud and money laundering to process money transfers from U.S. gamblers — it’s still called “Black Friday” in the online poker world. The U.S. seized the
.com domains operated by the three companies — along with 76 bank accounts spanning 145 countries — and issued criminal charges against eleven individuals, including site founders and executives. At the heart of the case: a small Utah bank (SunFirst) that miscoded transactions from the companies in an apparent effort to evade UIGEA. Instead of posting transactions for Internet gambling sites — which most U.S. banks and credit card companies would refuse to process — the bank would post online purchases for things like jewelry, golf balls, and dog food.
How the settlement works
Now, two of the three major online poker companies — PokerStars and Full Tilt — have come to settlement terms with the Justice Department. PokerStars will pay $547 million to the DOJ, and another $184 million to poker players owed money by Full Tilt Poker. As part of the deal, PokerStars will acquire all the assets of Full Tilt, and Full Tilt’s U.S. fraud “victims” will be able to seek compensation from the $547 million PokerStars is giving to the Justice Department. Reports have about $150 million credited to U.S. players’ Full Tilt accounts. PokerStars plans to keep the Full Tilt brand around, albeit outside the United States.
Neither company admits to any wrongdoing, and both maintain that online poker is legal, despite U.S. restrictions on Internet gambling. The settlement dismisses the civil complaints against both companies with prejudice — meaning the Justice Department can’t turn around and resurrect them to have another go at the companies if it likes. However the criminal charges against the eleven individuals named in the case — including the CEOs and Directors of Payments for both companies, as with payment processors and a vice chairman of SunFirst Bank — remain in place.
Interestingly, the deal would also permit PokerStars to operate in the United States if a legal framework emerges that legitimizes online poker.
Absolute Poker has also reached an agreement to turn over assets to the Justice Department; however, the settlement has not yet been approved.
Does online poker have a future in the U.S.?
Is there a chance U.S. online gambling regulations might change? In a word, yes.
At the same time the Justice Department was suing PokerStars, Full Tilt, and Absolute Poker, it did something else curious: out of the blue, it issued an opinion that the 1961 Wire Act — kind of the heart of all online gambling regulation in the United States — does not prohibit states from authorizing online gambling within their own borders. The opinion (pdf) was ostensibly offered only to answer a question about whether New York and Illinois could legally use out-of-state transaction processors to sell in-state lottery tickets, but it has broad implications. Individual states could decide that online gambling is perfectly acceptable within their borders.
Unsurprisingly, states are jumping at the opportunity. Nevada was the first through the gate, issuing its first online gambling licenses to Bally’s and IGT back in June. Immediately on Nevada’s heels, Delaware approved legislation allowing full-service online betting sites.
For states, online gambling represents a potentially lucrative new revenue stream: where operations like PokerStars and Absolute Poker largely operate outside U.S. tax and regulatory frameworks, individual states can issue licenses and set terms for online gambling operations — and get a cut of the revenue to bolster state coffers. Nevada is charging companies half a million dollars for an online gaming license, and $250,000 a year for renewals. To gaming companies, that’s pocket change — and the amount is intended to make Nevada a premiere destination for online gaming operators. California, in contrast, is considering legislation that would demand $1 to $5 million just to apply for a license — if granted, companies would have to pony up another $30 million as a credit against monthly taxes on gaming revenue.
Nonetheless, the legal framework for offering online gambling in the United States is far from clear — and a state-by-state approach may ultimately dissuade many companies from getting involved. The sheer overhead of potentially managing dozens of separate online gambling licenses and regulatory frameworks would not be insignificant. However, states are increasingly looking to gambling and things like lotteries as ways to bolster state revenue, and have noted the fiscal success of tribal casinos and limited casino operations. It’s probably only a matter of time before a significant minority of states legitimize online gambling — it’s just more likely the operations will be run by the same folks running local casinos, not corporations incorporated in overseas tax havens.